With all the recent and well documented turmoil with the US patent system at the same time Europe is moving toward a unified patent, the imminent passage of the Defend Trade Secrets Act and the White House finally recognizing the extensive damage to the US economy caused by cyber hacking, the IP landscape is changing fast and todays intellectual property strategies are looking a lot like investment strategies back in 2008-2009; they probably no longer work!
In case anyone forgot, intellectual property is still the cornerstone of most technology centered businesses: the vast majority of the assets developed and owned by technology companies are intangible assets, i.e. they reside in their internal information and employees’ brain (Intellectual Capital or “IC”) and the output thereof (Intellectual Property or “IP”). It is estimated that in excess of 85% of the valuation of the Nasdaq Index companies (and of the new global wealth being created) lies in intangible assets. With smaller technology companies, this percentage is sometimes close to 100%. Not convinced? Try selling your office equipment and your computers and see how much money you will raise.
Nowadays, most technology based companies eventually fail or succeed in large part because of the way they handle their intellectual capital assets and convert those into strategic intellectual property assets (we call this the “IQ to IP Conversion Ratio”) that allow them to enjoy a sustainable competitive advantage over their competitors. As the saying goes: “Innovation without protection is philanthropy!”
We have been reviewing and conducting IP strategies for companies for years and there are certain common mistakes we keep observing that most companies make and which are worth mentioning.
- Filing Invalid patents.Most companies we know will readily file patents on ‘inventions’ they made without reflecting upon its strategic value (or absence thereof) to the business and without knowing whether what they have will indeed lead to a valid and enforceable patent. In other words, they pay significant money (up to 25K per patent) to secure a right that may be irrelevant or illusory (often both), giving them and their investors a false sense of security about the strength of their IP position. When one simply considers that US patents are currently being invalidated at a rate of 70—80% based on the existence of prior art, it is mind boggling to think that any new patent still be drafted without having done a full prior art search which, for about 10% of the cost above, would have indicated whether it is worth going any further.
- Filing Undetectable Patents.Most companies do not understand when an innovation is better protected by patent, by trade secrets or by making a defensive publication (to present others from patenting it). We use great tools to help make that decision easy. Without entering into the details, suffice it to say that if it is practically impossible to detect of someone else is practicing your invention, the patent you obtained at great cost is most likely to unenforceable as you can’t make your case based on publicly available information. Worse, you will have told the rest of the world how you perfected the innovation over the years without any of the benefits of having a patent. Remember; innovation without protection is…
- Neglecting Other Types of IP Protection.IP is a lot more than patents and trade secrets. As many startups have proven, the value of a brand (e.g. Angry Birds), which is the buzz word for trademarks, should not be overlooked, nor the value of “eyeballs” (or goodwill), i.e. the amount of people using your products, even if for free (Facebook being the poster child). Therefore, the branding strategy of any company is paramount. Trade dress and industrial designs (design patents in the US) are also available to protect nonfunctional elements of products or services. In the fierce mobile patent war waged these past years between Apple and Samsung, it is ironic to remember that what really carried the day at the end had to do with the following icons, Apple’s being protected by a design patent. . Funny how things work sometimes…
- Not knowing If They Infringe Someone Else’s IP.I am always amazed how many billions of dollars are invested in new businesses each year without the slightest regard to whether they might not be able to offer their products or services without infringing the IP rights of others. We are not talking Fortune 500 who couldn’t possibly review all of their competitors’ IP before launching yet another products; I am referring to startups who are one trick ponies for the most part. Conducting a tailored Freedom to Operate, when done right, is neither expensive nor complex and it can bring a very high level of comfort (or discomfort in certain cases) knowing it like it is. Yet, very few investors are focused on this and they routinely invest in products that are ‘dead on arrival’ or whose profitability will be severely hampered by future ongoing royalty obligations.
- Having Inadequate Protection for Confidential Information.In a world where IP protection is currently shifting back to fewer patents and more trade secrets as a response to the weakening of the patent system, it is very scary to know that this is happening at a time when hacking and cyber espionage (nation sponsored in many cases) have never been so rampant and companies like Target, Sony and Premera to name a few who spend millions each year protecting their network (and your data) are being hacked routinely. Where does that leave the thousands of startups who generally rely on unsecured networks or the free cloud services like Dropbox to store and protect their most secret documents? Pretty much all companies we reviewed so far had vulnerable networks and no document sharing and retention policies in place. Use of non-networked storage for trade secrets is often the poor man’s best solution to sophisticated IT security.
- Having Weak or Inexistent Contractual Protection.Contracts are also powerful tools to create and protect rights and they stand a much better chance to be declared valid than patents in court in case of a dispute. Most companies we reviewed over the years had entered into flawed NDAs (limited to single purpose, short duration of protection, etc.) , employment or consultant agreements, etc. that left the ownership of some of their core IP uncertain at best. Those are the kind of documents that get looked at very closely during due diligence of any liquidity event and it is often too late to fix things by then.
- Granting Rights that Are Not Required.Many companies we assessed so far had conducted some level of consulting activities in their initial years or had ill-conceived distribution or sales agreements that effectively licensed some IP rights that they didn’t need to grant. This may impact valuation down at liquidity event if the acquirer realizes that some of the addressable market for the acquisition is already licensed under a given technology.
Those are some of the most common examples of why it is so crucial to define and implement an IP Strategy early in the life of a company, plan for the long term and be ready to revisit it often when things are changing. In short, treat it the way you’d treat your own retirement plan and you won’t go wrong. A well-articulated strategy will play a significant role in allowing a company to achieve and maintain a long term competitive advantage and return value to its owners and investors over time.